This excerpt taken from the EBAY DEF 14A filed May 16, 2005.
Approval of eBay Incentive Plan
The Board of Directors, upon the recommendation of the Compensation Committee, approved and adopted the eBay Incentive Plan, which we refer to as the eIP, on March 17, 2005, to be effective as of January 1, 2005, subject to the approval of the eIP by eBays stockholders. The eIP is being submitted to stockholders for approval so that payments to certain executive officers under the eIP will be deductible by eBay for federal income tax purposes as described below.
The eIP is an element of eBays overall compensation strategy to align employee compensation with eBays business objectives, strategy, and performance. The eIP is designed to reward eBays employees for delivering measurable results. The purpose of the eIP is to align compensation with quarterly and annual performance and to enable eBay to attract, retain, and reward highly qualified individuals who contribute to eBays success and motivate them to enhance the value of the Company.
As described below under Federal Income Tax Information, Section 162(m) of the Code denies a tax deduction to public companies for compensation paid to certain covered employees in a taxable year to the extent the compensation paid to a covered employee exceeds $1,000,000, unless the plan contains certain features that qualify the compensation as performance-based compensation.
The eIP is intended to satisfy the requirements for performance-based compensation as required by Section 162(m) of the Code. One of the requirements of performance-based compensation is that compensation be paid pursuant to a plan that has been approved by the companys stockholders. This is the first year eBay is asking stockholders to approve the eIP. However, eBay intends to administer the plan that is being submitted for stockholder approval for 2005 in a manner almost identical to the Management Incentive Plan that eBay has used in the past to motivate employees to drive demonstrated superior results for the company.
In addition to asking for stockholder approval of the eIP, eBay has structured the eIP to satisfy additional requirements of Section 162(m) of the Code for performance-based compensation. The Board believes approval of the eIP is in the best interest of eBay and its stockholders. The eIP motivates and rewards eBays employees for achievement of strategic, operational and financial goals that drive stockholder value, and will now be structured to be advantageous for federal income tax purposes.
If the eIP is not approved by stockholders, it is currently contemplated that eBay would continue to make awards under its current Management Incentive Plan and that such bonuses to covered employees would not be deductible under Section 162(m) of the Code to the extent that (in combination with other non-exempt compensation, e.g., salary) they exceed the $1,000,000 limit. If the eIP is not approved by stockholders, it is currently contemplated that eBay would resubmit the eIP for stockholder approval in 2006.